By Jacob Reardon a Solicitor of Matthews Folbigg, in our Insolvency, Restructuring and Debt Recovery Group.
A bankrupt may apply to the Court under section 153B of the Bankruptcy Act 1966 (Cth) (“the Act”) to have the bankruptcy annulled. With some exceptions, the effect of an annulment is to place the bankrupt back in the position as if there had been no bankruptcy. Most annulments occur following a sequestration order obtained by a creditor – for instance where the debtor was simply unaware of the petitioning creditor’s debt, can pay the debt and is otherwise solvent (an expensive process but perfectly achievable with good advice).
But what about where a bankrupt wants to annul a bankruptcy which is based upon presentation of the debtor’s own petition? Is that even possible?
Section 153B(1) of the Act specifically refers to annulment of a debtor’s petition, and so specifically contemplates annulment even though the bankruptcy was commenced by the bankrupt. However annulment requires that the Court must be satisfied that the debtor’s petition “ought not to have been presented or ought not to have been accepted by the Official Receiver”. So under section 153B(2) of the Act, the Court is empowered to annul a bankruptcy even in a situation where a bankrupt was insolvent at the time the debtor’s petition was presented. But when would the Court consider that to be appropriate?
The recent Federal Court decision in Thompson v Lane (Trustee) (No 3) [2022] FCA 128 concerned an application brought by a bankrupt seeking to annul her bankruptcy based on her own presentation of a debtor’s petition.
On 1 July 2020, Ms Thompson (“the Bankrupt”) became bankrupt pursuant to her presentation (and acceptance by the Official Receiver) of a debtor’s petition. However, in her application for annulment the Bankrupt said that the debtor’s petition ought not to have been presented, and should not have been accepted by the Official Receiver. This is because, she said, she had at all times been solvent.
It is relevant to observe that at the time of filing her debtor’s petition, a creditor had in fact filed a creditor’s petition against her in the Federal Circuit Court of Australia (as it was then called) based on non-compliance by the Bankrupt with a bankruptcy notice. This, of course, meant that there was at least a judgment against her (which would have been the basis of the bankruptcy notice) and no obvious explanation why this had not been paid.
The Court observed it was inherently unlikely that a person would present a debtor’s petition without having formed a settled view that he or she was unable to pay their debts as and when they fell due. However, the Court accepted, there is in fact little authority regarding the circumstances on which a Court might the annulment of a bankruptcy grounded in a debtor’s petition.
In determining whether the Court’s discretion to annul the bankruptcy should be used, the Court considered the effect and requirements of section 153B of the Act.
Section 153B of the Act
The Court found that an application to annul a bankruptcy based on a debtor’s petition entails proof of the following elements, namely that:
- the debtor’s petition should not have been presented by a bankrupt or accepted by the Official Receiver; or
- the Court is otherwise satisfied that its discretion to annul the bankruptcy is justified.
In determining the exercise of its discretion the Court said that cases concerning whether or not to annul a bankruptcy in the context of a sequestration order (that is, bankruptcy by a creditor) are still relevant as to some of the considerations which have proved useful in the exercise of the Court’s discretion in those cases. However, these considerations should “…not be applied mechanically in some sort of ‘checklist’ way to the detriment of a consideration of the overall circumstances of an individual case.”
Discretionary considerations
In considering the relevant discretionary factors, the court had regard to a non-exhaustive summary of discretionary factors formulated by Banks-Smith J in Zaghloul v Jewellery & Gift Buying Services Pty Ltd t/as Nationwide Jewellers [2020] FCA 1045 as follows:
- Whether the applicant is solvent;
- Whether the applicant has made full disclosure of his or her financial affairs;
- Whether there is any unexplained delay in bringing the application;
- The reason why the bankrupt presented the debtor’s petition (including whether the applicant was served with a bankruptcy notice prior to the presentation of the debtors petition, and if so, whether the bankruptcy notice was complied with);
- Why it was that the applicant lodged a contemporaneous Statement of Affairs apparently disclosing insolvency and what was the true position regarding their ability to pay debts as and when they fell due; and
- Whether the applicant has made any proposal for the payment of fees and disbursements of the trustee, and if not, why not.
As in the context of a bankruptcy arising from the making of a sequestration order, an applicant for annulment is under an obligation of full candour regarding his or her financial affairs. Any failure in this regard is quite likely to be fatal to an annulment application.
Section 55 of the Act
The Court also referred to section 55 of the Act which provides a number of bases upon which a debtor’s petition ought not to be presented or accepted. Section 55 empowers the Official Receiver to refuse to accept a debtor’s petition in certain circumstances.
However, in the present case the Bankrupt’s claim, that her petition ought not to have been accepted by the Official Receiver, did not centre on any technical deficiencies regarding section 55 of the Act. The Bankrupt’s contention was that she was not insolvent at the time of making her debtor’s petition.
Decision
The Court said that in an annulment application the Bankrupt is not obliged to prove solvency as at the date of the presentation of the debtor’s petition. This is due to the operation of section 153B(2) which says that an annulment application can be successful regardless of solvency. However, this did not at all mean that the Bankrupt’s solvency was irrelevant, and indeed in the present case, solvency proved to be central to the Court’s analysis.
The Court ultimately determined that it was unable to annul the Bankrupt’s bankruptcy for the following reasons:
- Her bankrupt estate was unfunded (meaning the Trustee’s own remuneration and expenses were unpaid);
- The equity (even on a generous assessment) in the Bankrupt’s property was well short of the debts in her bankrupt estate (without even taking into account the costs of the administration of her bankrupt estate);
- The bankrupt was unable to borrow funds to satisfy her debts in full or even the debt of the petitioning creditor in the bankruptcy notice served on the Bankrupt prior to her bankruptcy;
- At the time of signing her Statement of Affairs a secured lender had already entered into possession of one of her properties;
- The Bankrupt had insufficient income to meet the payment of her immediately due and payable debts; and
- Even though section 153B(2 could in theory allow an annulment order despite a bankrupt’s hopelessly insolvent situation, the Bankrupt in this case had failed to establish that her financial position was any better than at the time she had presented her debtor’s petition.
Importantly, that Court also observed that there was considerable lapse in time between the bankruptcy and the filing of the annulment application.
Poor compliance
A final key factor to the Court’s decision was that there had been persistent non-compliance by the Bankrupt with her obligations of disclosure to her trustee. Given the Bankrupt’s poor compliance record the Court’s view was that it was in the public interest that she remain subject to the obligations imposed upon her, as a bankrupt, under the Act.
In summing up the decision Logan J said “The case appears to me to be one where, faced with the imminent prospect of a sequestration order on a creditor’s petition and being of the belief that she was not then solvent, Ms Thompson just chose voluntarily to become bankrupt on her own petition. Neither then nor, even more importantly, now was or is she solvent.”
Read the decision here
Applications by debtor petitions bankrupts to annul their bankruptcy are uncommon in the context of a Debtor’s Petition. While not impossible, the above decision demonstrates specialist consideration, and particular actions are central to the Court’s consideration as to whether to exercise its discretion to annul a bankruptcy.
If you would like more information or advice in relation to Insolvency, Restructuring or Debt Recovery law, please contact a Principal of the Matthews Folbigg Insolvency, Restructuring & Debt Recovery Group.
Jeffrey Brown on (02) 9806 7446 or jeffreyb@matthewsfolbigg.com.au
Stephen Mullette on (02) 9806 7459 or stephenm@matthewsfolbigg.com.au
